Devon Energy Corp. is moving forward with plans to form a publicly traded master limited partnership that will own a minority stake in its U.S. midstream business, the company announced Thursday.
Devon's board of directors has signed off on the plan, so the company expects to file a registration statement with the U.S. Securities and Exchange Commission in the third quarter. An initial public offering will follow subject to market conditions.
Devon CEO John Richels raised the possibility of such a move during the company's fourth-quarter earnings call in February.
“If we have assets that we do not believe are being appropriately reflected in our stock price, we're working to determine how that value might be realized or more appropriately reflected in our stock,” Richels told analysts during the call. “However, anything we do must be thoughtful and smart and must enhance long-term value.
“We will not pursue a short-lived bump in the stock price at the expense of sustained value creation.”
Thursday's announcement did not do much for Devon's stock price, which dropped 81 cents to $55.83 a share.
Devon said Thursday it will own the majority of common units in the new midstream partnership. The company expects to use proceeds from the offering to fund its continuing operations.
Others had success
Devon's domestic midstream operations are the largest among U.S. independent producers, with more than 6,500 miles of pipelines, 300 compressor units and eight gas processing plants with net inlet capacity of nearly 1.2 billion cubic feet per day, according to the company's website.
The master limited partnership setup has been successful for other state energy companies, including Williams and Chesapeake Energy Corp.
Edmond investment adviser Greg Womack said such arrangements bring together the best parts of partnerships and corporations, with tax advantages that can benefit investors.
Master limited partnerships don't pay corporate income tax, so there is more cash available to pay those who hold partnership units, he said.
“The yields are much higher for unit holders of MLPs,” Womack said.
Devon also stands to cash in on spinning off its midstream assets, he said, as proceeds could be dedicated to funding additional drilling opportunities with high rates of return, like west Texas' Permian Basin.
“Subsequent sale of more pipelines and processing plants to a partnership could be used to accelerate options in key fields, and even be used for stock buybacks, creating potentially even more value for shareholders,” Womack said.